Alan Greenspan gave a strong hint that the Federal Reserve will not raise short-term interest rates next month, saying mechanisms already in place should slow the U.S. economy before inflationary pressures mount.
But the Fed chairman told a congressional panel that the Fed is determined to "hold the line on inflation, through policy actions if necessary." The Federal Open Market Committee, the Fed's policymaking arm, next meets Aug. 24.
The Fed believes "there are mechanisms in place that should help to slow the growth of spending to a pace more consistent with that of potential output growth," Greenspan said in his semiannual Humphrey-Hawkins testimony to the House Banking Committee.
Although "real GDP (gross domestic product) is growing faster than its potential," he said, "the governors and bank presidents do not anticipate a further pickup in inflation going forward."
Greenspan's testimony was the even-handed presentation that most Fedwatchers were looking for. Indeed, his testimony echoed his statements of the past few years that the economy is enjoying a profound transformation in productivity growth that is boosting output, employment, incomes, profits and living standards while restraining inflation.
At the same time, he cautioned, the good times could end at any time, if productivity growth flattens out or if labor markets continue to tighten.
The Fed's imperative is maximum growth and that requires stable prices, he said. "Stable prices allow households and firms to concentrate their efforts on what they do best: consuming, producing, saving, and investing."
The Federal Open Market Committee raised its target for the Federal funds rate by a quarter percentage point to 5 percent at its June 30 meeting. "To have refrained from doing so in our judgment would have put the U.S. economy's expansion as risk," Greenspan said. "It is imperative that we do not become complacent."
Greenspan also defended the FOMC's return to a "neutral policy directive" at the June meeting. "The FOMC did not want to foster the impression that it was committed in short order to tighten further," he said. "Rather, it judged that it would need to evaluate the incoming data."
Most analysts don't expect another hike at the Aug. 24 meeting, largely because the economic data have shown a slight slowdown and a return to stable prices.
As part of his testimony, the Federal Reserve said it expects the economy to grow between 3.5 percent and 3.75 percent this year, implying a slowdown from the torrid 4.3 pace in the first quarter. For 2000, the Fed expects gross domestic product to grow 2.5 percent to 3 percent, well within the presumed speed limit of the economy.
The Fed expects inflation, as measured by the Consumer Price Index, to measure 2.25 percent to 2.5 percent this year before falling to 2 percent to 2.5 percent in 2000.
Much of Greenspan's testimony plowed te old ground of the productivity story and the limits of that revolution. Among the forces limiting the growth of the economy are possible labor shortages, higher interest rates due to capital outflows to improving foreign economies, and end of commodity prices disinflation around the globe.
Written By Rex Nutting, Washington bureau chief for CBS MarketWatch